Cambodia’s central bank has raised the minimum capital requirement of banking institutions operating in the Kingdom, doubling the capital threshold for commercial and specialised banks, and increasing it more than ten-fold for microfinance institutions – a move some analysts predict will likely lead to more consolidation in the sector.
A prakas by the National Bank of Cambodia (NBC) published yesterday requires all commercial banks, including subsidiaries of foreign banks, to increase their minimum capital to the equivalent of $75 million.
Previously, commercial banks were required to hold a minimum capital of $37.5 million, while subsidiaries of foreign banks with an investment-grade ranking required just $12.5 million capital.
Specialised banks are required to raise their minimum capital to $15 million, from $7.5 million.
The increases are even more substantial for microfinance institutions (MFIs), with deposit-taking MFIs required to increase their minimum capital to $30 million, up from $2.5 million.
MFIs not licensed to receive deposits must raise their capital to $1.5 million, nearly 25 times greater than the previous level of $62,500. Banking and financial institutions will have two years to meet the new capital requirements, the prakas dated March 22 said, without listing consequences for non-compliance.
NBC general-director Chea Serey said the decision to increase the minimum capital requirement was a prudential measure aimed at ensuring that banks operate safely and securely, while maintaining financial stability. She said it was important to strengthen the banking sector while it was healthy ahead of any possible downturn.
“You don’t start an insurance policy when you are already sick. No one will insure you,” she said.
While bankers and analysts welcomed the long-anticipated measure, some argued it could prove challenging for dozens of smaller-capitalised banks and MFIs. By one estimate, nearly a third of all commercial banks and a quarter of micro-lenders could struggle to meet the new threshold requirement by the deadline.
In Channy, president and group managing director of Acleda Bank, said this was the third time the NBC had raised the minimum capital requirement of commercial banks. The first was in 1999, when the central bank increased it from $5 million to $13 million, and it was increased again in 2008 to $37.5 million.
He said the incremental changes reflected the robust growth of the economy over the past 15 years. Cambodia’s GDP of $18.5 billion in 2015 was almost five times larger than it was in 2000.
“The banking and financial institutions, [as well as] their financial services and products are now more sophisticated, and the business requirements are now far larger than what they used to be in past five to 10 years,” Channy said.
In an investor note issued yesterday, investment firm Mekong Strategic Partners (MSP) argued that the doubling of the minimum capital requirement for commercial banks was warranted given that the Kingdom’s finance sector has grown more than 750 per cent since the last rate hike in 2008.
“If minimum capital levels had grown at the same rate, we would be talking about a minimum level of at least $300 million (putting aside the impact of additional banks in the system). So people should not see this $75 million as being excessive,” it said.
The higher rates should, however, curb the proliferation of commercial banks in Cambodia – which now number nearly 40 in total. New entrants would need to build a loan book of at least $300 million in about five to seven years to generate a sufficient return to cover the $75 million upfront capital requirement, it said.
For existing banks, the note’s authors argued that commercial banks with less than $60 million paid-up capital – more than a third of the sector – would be hard pressed to reach the new level within two years.
“We believe at least 15 banks will be in this category,” it said. “They will either require a capital injection from their owners, or will need to consider a merger or sale. Potentially, some banks may need to consider downgrading to specialised bank status, although this will mean shutting down their deposit business.”
Yun Sui Sang, president of Union Commercial Bank, which sat just above the threshold level at the end of 2014 with $38.2 million paid-up capital, said banks were already moving toward compliance and “maybe only two or three banks” would be unable to secure the required capital through organic growth.
“Our capital is almost there now,” Sui Sang said. “We’re already at $73 million . . . and should meet the [requirement] by the end of the year.”
According to Serey, the significantly higher minimum capital requirement for MFIs was prompted by the sector’s growth and maturation. MFIs began in Cambodia in the 1990s as small NGOs with a social mission, but now constitute 20 per cent of the banking sector and a growing customer base.
“Historically . . . we didn’t want to overburden MFIs with excessive regulatory costs,” she said. “However, the MFI landscape now is completely different.”
Sim Senacheert, CEO or Prasac Microfinance Institution Ltd, said the new capital requirements were reasonable, particularly for deposit-taking MFIs, which he said should have sufficient capital to cover the public’s deposits.
He said the new requirements would not challenge Prasac, which currently operates with $72 million paid-up capital and plans to increase this to $110 million by the end of the year. Nor did he expect any of the country’s nearly 50 licensed MFIs to falter, given the two-year compliance window.
“I expect MFIs will be able to fulfil the requirement without any problem,” he said.
Half of the country’s eight deposit-taking MFIs, which represent about 90 per cent of the market, already meet the new minimum capital requirement of $30 million, while the other half are on track to meet the target by 2018, MSP said in its investor note.
But the remainder of the MFI industry could struggle to comply with the minimum $1.5 million capital requirement.
“We believe that around a quarter will struggle to meet the target without a capital injection or merger. As a result, we expect to see some consolidation at the smaller end of the MFI market, although given the very small size of these MFIs, the overall impact on the sector will not be material,” it said.